The Swiss National Bank cut its main interest rate by 25 basis points to 1.50% on Thursday, a surprise move which made it the first major central bank to dial back tighter monetary policy aimed at tackling inflation.
The central bank, in the first rate decision since long-serving Chairman Thomas Jordan said he would step down in September, also cut its interest rate on sight deposits to 1.50%.
The SNB's decision, its first rate cut in nine years, was the first in a busy day for central banks in Europe, with the Bank of England and Norwegian central bank also due to announce their latest policy decisions. Economists expect no change from the Bank of England or from the Norges Bank.
The SNB move caught markets by surprise, sending the Swiss franc to an eight-month low against the euro and Swiss government bond yields tumbling, while boosting Zurich-listed shares. A majority of analysts polled by Reuters had expected the usually conservative SNB to keep rates on hold at 1.75% and wait at least another three months before moving.
The step comes after Swiss inflation dipped to 1.2% in February, the ninth month in succession that price rises have been within the SNB's 0-2% target range.
"The easing of monetary policy has been made possible because the fight against inflation over the past two and a half years has been effective," Jordan told reporters, noting how Swiss inflation has held below 2% for several months.
"According to our new forecast, inflation is also likely to remain in this range over the next few years."
The SNB said it was taking into account the reduced inflationary pressure as well as the appreciation of the Swiss franc in real terms over the past year. The cut would support economic activity, it added.
Philipp Burckhardt, Fixed Income Strategist and Portfolio Manager at Lombard Odier IM, said Thursday's move was a logical consequence of economic and market conditions and signalled more cuts ahead.
"This is also an ideal farewell gift from Thomas Jordan, who can now clearly set the direction for his successor," he said.
ECB, FED
The European Central Bank is expected to make its first reduction in borrowing costs in June after it kept its interest rates on hold earlier this month.
The U.S. Federal Reserve on Wednesday left its benchmark interest rate unchanged but retained its outlook for three cuts in borrowing costs this year.
Economists said the SNB's rate cut was a bold move given the central bank's usual caution.
"The SNB's decision is a surprise, but was always a possibility because of the low inflation in Switzerland," said UBS economist Alessandro Bee.
"It's a brave move to go before the ECB and Fed, although the SNB will not see it that way, and they probably believe the other central banks will also cut rates later this year."
In its updated economic projections, the SNB dialled down its inflation forecasts, expecting it to average at 1.4% in 2024, down from its December forecast for a rate of 1.9%.
Inflation is expected to finish next year at 1.2%, down from 1.6% previously forecast.
